The FHA was formed in the 1930s to facilitate the construction, renovation, and acquisition of affordable housing. In 1965, the FHA officially became a part of the Department of Housing and Urban Development (HUD). HUD’s main function is to fund and promote the development of affordable multi-family housing. The program has expanded to include senior housing, assisted living facilities, skilled nursing facilities, and hospitals. However, developers are restricted by limitations on the amount of commercial (non-residential) space in qualifying projects.
The FHA does not originate loans. The agency instead insures loans that are made by commercial lenders. There are hundreds of licensed HUD/FHA lenders, each with diverse appetites, expertise, and qualifications. The insurance is available only to qualifying properties, and serves as a credit enhancement by which the lender can confidently offer higher loan proceeds at a lower interest rate than is otherwise possible. These fully amortizing, non-recourse loans are used to build, renovate, and hold rental apartment and healthcare properties.
In addition to the program’s implied U.S. Government guaranty, FHA-insured financing is distinguished by high loan to value ratios, low equity requirements, and flexible borrower qualification standards. Furthermore, extended fixed-rate loan terms and amortization schedules of 35 to 40 years reduce monthly debt service payments.
Note that despite their overall affordability, FHA-insured loans often carry additional costs. These include significant fees, closing expenses, and a required use of “fair wage labor” for construction. A mortgage insurance premium (MIP) is added on to the interest rate. The program also includes cost-per-unit restrictions that preclude projects from luxury housing specifications. Lastly, note that FHA loans take a long time to close, and for this reason can be difficult to utilize for acquisitions.
See the chart below for primary categories of loan products for multifamily, healthcare, and hospitals.
|Apartment construction or substantial rehabilitation-Multifamily
-Senior independent apartments
|FHA 221-FHA 221(d)(4)
|Apartment acquisition or refinancing-Market rate affordable
-Refinancing of property with existing FHA-insured loans
-Mark-to-market restructuring through HUD’s OAHP
-Refinancing of section 202 HUD direct loan
- Refinancing of section 236 loan
- Senior independent apartments
|FHA 223-FHA 223(f)
-FHA 223(a)(7) or FHA223(f)
|Nursing homes new construction or substantial rehabilitation||FHA 232|
|Assisted living facilities new construction or substantial rehabilitation||FHA 232|
|Board and care facilities new construction or substantial rehabilitation||FHA 232|
|Hospital construction or substantial rehabilitation||FHA 242|